A bumpy year for Maryland's economy

Maryland's economy has grown almost without fail in the last quarter-century, ticking up year after year.

But not in 2013.

That's according to early estimates from the U.S. Department of Commerce, which showed Maryland's gross domestic product stagnating last year — putting the state near the bottom of the national pack. Only the District of Columbia and Alaska fared worse.

It's another indication that 2013 wasn't great for Maryland, where federal budget cuts had an outsized effect because of the state's big cluster of federal contractors and agencies.

The state's personal income growth was among the nation's smallest last year, the Commerce Department reported earlier. And while job growth didn't rank quite so badly, Maryland's rate of expansion was outpaced by three-quarters of the country.

So the poor showing on GDP did not come as a complete shock to some local economists.

"It's not good news, but it's not surprising," said Richard Clinch, a locally based research economist at Battelle Memorial Institute. "I think the 2014 numbers, when they come out a year from now, are going to be slightly better. But Maryland is going to be in a period of slower growth because this government slowdown … is at least going to continue in the near term."

Groups that have long griped about the state's business climate hope the time is now ripe for tax and policy changes. The Maryland Competitiveness Coalition, led by the Maryland Chamber of Commerce and made up of 60 business groups and employers, is sharing its "action plan" for growth with candidates running for governor this year.

"Maryland has great assets, but we have some serious concerns about our future, and I think this [GDP] report that came out is an indicator that we have to change the way that we're encouraging job growth in Maryland," said Kathleen T. Snyder, the chamber's CEO.

The coalition's recommendations include economic development — such as focusing on high-tech manufacturing and the commercial side of cybersecurity — and shifts in tax policy. The group advocates for reducing the corporate income tax rate and the personal income tax rate for people earning between $100,000 and $250,000.

Though nearly all states saw some GDP expansion last year, Maryland's lagging performance was part of a regional story.

Washington's GDP declined by half a percent. Virginia's GDP blipped up a tenth of a percent. Pennsylvania was also in the bottom five, with growth of less than 1 percent.

"There's a pattern, more or less — a regional pattern," said Mikra Krasniqi, economist for the state Department of Business and Economic Development.

The biggest drag on Maryland's GDP last year was government, the Commerce Department said. Pullbacks in that sector sliced $351 million from total GDP, compared with a $551 million addition the year before.

But that number doesn't account for the full effect of federal cutbacks because it leaves out government contractors, a major part of Maryland's economy.

The Commerce Department doesn't track such businesses as a group, but the contractor-heavy professional, scientific and technical services sector — which grew even during the rough 2008-2009 recession — shrank $148 million last year. It added $785 million to GDP the year before.

The "sequestration" budget cuts and the partial government shutdown in October "took some wind out of the sails" of Maryland's economy, said Daraius Irani, executive director of the Regional Economic Studies Institute at Towson University.

Baltimore economist Anirban Basu said Maryland's problem was that nothing could offset federal cuts in a major way.

"The sectors that are really driving the economy forward in America are not really present in significant ways in Maryland," said Basu, head of Sage Policy Group, a Baltimore economic and policy consulting firm. "Among the contributors to growth in 2013 were energy production and industrial production expansion, and Maryland is not a significant player in either sector."

The state's mining and manufacturing sectors both experienced declining output. States with the biggest GDP gains included energy producers North Dakota, Wyoming and West Virginia, all of which had economic growth that topped 5 percent.

That expansion fueled a jobs boom in North Dakota, which had the country's fastest rate of employment growth last year. But there's not always a neat link between GDP and help wanted. Wyoming added jobs at a slower pace than Maryland, and West Virginia actually lost 2,000 jobs last year.

Basu said Maryland's job growth was better than the early GDP estimates suggest it would have been last year. The Commerce Department will revise the figures as more information comes in, so it's possible the later snapshot could show some GDP growth.

But Basu doesn't think the state's ranking will change much. Most of the Mid-Atlantic is caught in slow growth, and he suggested that the region's leaders "come together and try to figure out how that can be changed."

His prescription for Maryland: diversify. He suggests the state take a hard look at policies on taxes, zoning, regulation and energy policy to encourage more growth that isn't linked to Washington.

Christopher B. Summers, president of the conservative Maryland Public Policy Institute and a critic of the state's tax policies, said the GDP report ought to be a "wake-up call" for state leaders.

"The big question is, will they finally admit, 'Gee, what we've been doing is wrong'?" he said.

Maryland's tax climate isn't competitive, Battelle's Clinch said, but he also attributes the state's dependence on federal spending to proximity. Federal jobs and contracting positions typically pay well, he said, and that has had a "crowding-out effect" on other businesses.

He thinks the state has plenty of assets to build on, including large amounts of research and development, an educated workforce, an active port and its Interstate 95 location. It's a matter of capitalizing on them more effectively, Clinch said.

Maryland was in this position before — in the early '90s, when post-Cold War cuts to defense pinched the state. Two decades ago, major Maryland employers tapped a University of Baltimore team, including Clinch, to write a report on what factors were helping and hurting the state's efforts to deal with the change. (One of the key issues listed on the negative side of the ledger: high taxes.)

But the moment of reckoning was delayed. The nationwide tech bubble lifted hiring and Maryland rode it straight into a new era of bigger federal spending after the Sept. 11 terrorist attacks.

Maryland's stagnant gross domestic product ranked the state near the bottom for economic growth last year, according to early estimates from the U.S. Department of Commerce. States at the top were boosted by natural resources, such as energy production.

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